Online ISA: all the benefits and how to open it

An online ISA is an account that gives you the opportunity to save and invest money without having to pay any tax, provided any contributions you make are with your annual online ISA allowance.

ISAs (Individual Savings Accounts) were introduced on the 6^th of April 1999 by Norman Lamont, the Chancellor of the Exchequer at that time. They were brought in to replace the General PEP (Personal Equity Plan). When first launched, the annual ISA allowance was £7,000 per tax.

What is an online ISA?

An online ISA is an ISA that you can manage entirely over the internet. For most people, it is the easiest and most convenient way of managing their account. An online ISA is different from a standard ISA also known as a traditional or regular ISA. A standard ISA is typically offered by traditional banks, building societies, or other financial institutions, and it can be managed online, by phone, or in person.

You can have an online ISA account for each of the different types of ISAs, of which there are five. They include:

• The Cash ISA
• The Innovative Finance ISA
• The Stocks and Shares ISA
• The Junior ISA
• The Lifetime ISA

The best type of ISA depends on your individual circumstances. If, for example, you are totally averse to taking a risk, the best account for you is likely to be an online Cash ISA. What is a Cash ISA? A Cash ISA works in a similar way to an ordinary bank savings account.

One example of this type of ISA is the Post Office online ISA. They offer three options. The first is their easy access online Cash ISA, which according to issue 34, offers interest at 2.85% tax-free/AER (annual equivalent rate) variable.

Then they have two fixed rate Cash ISAs which, according to issue 36, offer 3.50% tax-free/AER fixed for one year or 3.60% tax-free/AER fixed for two years. Interest is calculated daily and paid in March or on the anniversary of the account being opened, depending on whether it is a variable or fixed interest account.

If you are uncertain about which account to choose, you might find the “choosing between a savings account and an ISA” article on the Moneyfarm website helpful. While there is less risk associated with a Cash ISA, the interest rates are relatively low, as shown above. Low interest rates mean that inflation will devalue your funds in real terms.

If you are not risk averse and you are looking for an ISA that offers better interest rates, an online Stocks and Shares ISA might be a good choice.

What are the main differences between an online ISA and a standard ISA?

An online ISA works in the same way as an ordinary ISA, but online ISAs have several advantages over a standard ISA, such as accessibility, convenience, and cost-effectiveness.

• Accessibility: With an online ISA, you can manage and check the status of your account and make deposits and withdrawals from anywhere with an internet connection via an online platform or mobile app. A standard ISA may require visiting a bank or building society in person to manage or make changes to your account.
• Convenience: Online ISAs are more convenient as 24/7 access to your account is available, and account management and quick transactions are performed easily. A standard ISA may have limited access, and you may need to make appointments at a bank or building society in person to initiate transactions.
• Fees: Online ISAs may not have a fee or charge low fees, while standard ISAs may have account management or investment services fees.
• Interest rates: The ISA provider determines the interest rates offered on online ISAs and standard ISAs. However, online ISAs may offer higher interest rates due to lower overhead costs.
• Personal advice: Standard ISAs may offer more personalised advice and support from financial advisors, whereas online ISAs may provide more limited or automated advice.

It’s important to compare the features, fees, and interest rates of both types of ISAs before choosing the right one for your needs.

The ISA allowance for an online ISA and a standard ISA?

The ISA allowance is the same for both standard and online ISAs. It stands at £20,000 per tax year for Cash, Innovative Finance, and Stocks and Shares ISAs. For an online Junior and Lifetime ISA, it is £9,000 and £4,000, respectively.

The £20,000 allowance can be split between all ISA variants. For example, you could maximise annual investments in a Junior and a Lifetime ISA and still have £7,000 left over to invest in any combination of Cash, Innovative Finance, or Stocks and Shares ISAs.

Benefits and limitations of opening an online ISA

The only noteworthy limitation with an online ISA is the £20,000 annual ISA allowance. If you’re fortunate enough to want to invest more than this in any one tax year, after using up your online ISA allowance to the full, you may have to invest the balance in other investment options, such as a general savings account or general investment account.

Unfortunately, general savings or investment accounts are not tax wrappers, so they do not come with the tax benefits perks of an ISA account. On the bright side, you can invest as much as you want, open various portfolios for your different financial goals and gain access to your funds as and when needed.

How to open an online ISA account

The process of opening an ISA account online is easy and straightforward. First, choose the best ISA that suits your financial circumstances and appetite for risk. All you have to do to open an online ISA account is to find a provider that offers the type of ISA you want and follow their online application process.

Visit the website of your preferred provider, navigate your way to the webpage on ISAs, and click on the “get started” button. The online process may involve providing some personal and financial information. Don’t forget that before you go ahead, you need to plan your finances carefully.

Any good FCSC-approved investment advisor and investment management company, like Moneyfarm, will check out your attitude towards risk and what your financial goals are and will then help you choose the right online ISA investment portfolio.

Make sure to read through any relevant terms and conditions before you complete the online ISA application form.

Transferring your existing ISA to an online ISA

Not all ISAs are equal. If you are looking for the best online Stocks and Shares ISA, Moneyfarm ISAs are well worth considering. There are seven different pre-prepared portfolios, each one offering a different combination of shares in various companies and industries, and each with different levels of risk and return.

If, after checking out the Moneyfarm ISAs, you would like to swap ISA providers, you’ll find the “How to transfer your ISA” blog on Moneyfarm’s Insights section of interest.

Online ISA tax implications

The treatment of ISAs for tax purposes is simple. The tax advantages are considerable if you comply with the annual ISA allowance. Any interest earned is tax-free interest – no capital gains tax. Also, you will not have to pay any income tax on anything you withdraw. Also, you don’t even have to declare your ISAs on any tax returns.

FAQ

What are the benefits of an online ISA account?

The main benefit of an online ISA account is that the money saved is tax-free, which means you don’t pay tax on interests earned on your savings. Additionally, an online ISA account can be more convenient to manage than a traditional savings account due to its 24/7 accessibility from anywhere with an internet connection.

How often can I add money to an online ISA account?

You can contribute as often as you want within a tax year, but it must not exceed the annual limit across all types of ISAs.

What types of ISAs are available online?

The types of online ISAs available to you online include a Cash ISA, Stocks & Shares ISA, Innovative Finance ISA and Lifetime ISA.